Nearly every manufacturing firm has had the experience of checking an inventory list for a requested item and finding that the supply was listed at zero, only to later discover that there were several of the same items sitting somewhere on a supply shelf. Such human errors are commonly made in the recording of inventory. All it takes for such an error to occur is for an item number or product quantity to be recorded incorrectly, or not recorded at all.
Such day-to-day errors have a direct effect on the cash flow and working capital of an organization. Though each discrepancy may be small, at the end of the year the amount of wasted cash can be considerable.
Lack of Executive Planning
In a research report by Bart Kelly, a principal at Crowe Horwath LLP, titled “Shedding Light On Working Capital Management Challenges and Best Practices,” Mr. Kelly reveals a shocking statistic. Even though 88 percent of the executives he surveyed believed that better management of their working capital was important to their company’s success and would increase their overall profit margin, over half did not have any specific strategy for doing so. In addition, executives singled out accounts payable as one of the areas where better management was needed.
Aside from a misunderstanding of the connection between operations and finance, another important reason cited for the absence of a workable strategy was a lack of metrics. Efficient metrics were missing that would make tracking of the results of daily financial decisions easier. According to Mr. Kelly, two-thirds of the companies in the survey were found to have inventory turnover rates that were too slow. In some cases, this resulted in the holding of obsolete inventory and excessive write-offs. Poor scheduling, production and supplier management were listed as the biggest reasons for slow turnover.
Accounts Payable Automation and Dynamic Discounting
Accounts payable automation can directly improve all three of these areas. AP automation can benefit scheduling by streamlining accounts payable processes, allowing greater control over workflow, and drastically reducing human error. It can benefit production by the availability of metrics to determine which raw materials used in production are the most cost effective. It can benefit supplier management by identifying the suppliers who offer the best invoicing terms, products and service.
In addition, with the introduction of E-invoicing into the accounts payable process allows dynamic discounting to function. Dynamic discounting offers businesses the opportunity to take advantage of early payment terms, resulting in the capturing of greater discounts and the fostering of better relationships with suppliers. The obvious outcome is that through the use of electronic invoicing, inventory turnover rates can be shortened.
Perhaps the most surprising statistic in Shedding Light On Working Capital Management Challenges and Best Practices, is that 76 percent of companies surveyed earn 20 percent or less return on their capital expenditures. Capital expenditures must be closely monitored and managed on a daily basis in order to create a healthier cash flow, devoid of as much waste as possible. Accounts payable automation offers a wealth of metrics for doing this much more efficiently.
Electronic invoicing can give business leaders the tools they need to devise a strong corporate strategy for reducing working capital and making every dollar work harder. For any profit-based business, that’s good news.
Bart Kelly: “Shedding Light on Working Capital Management Challenges and Best Practices”:
http:// www.crowehorwath.com/: June 2016